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New Purchasing Rules for 529 Plans

Aside from tuition, books and housing, a computer can be one of the biggest expenses when starting college. Many students find that their new college lifestyle and coursework necessitate the purchase of a new computer.

In 2009 and 2010, funds from 529 plans could be used to pay for computers, which was a big help to students and their families. After that, however, computer purchases were allowed only if the educational institution specifically required the computer for attendance.

Fortunately, a new law passed at the end of 2015 reinstated the permission to use 529 funds for computers, whether or not they are explicitly required by the school. Although the legislation extended retroactively for all of 2015, that does not mean you can withdraw funds to pay for a computer purchased in 2015 now that it’s 2016.

“Most tax advisers tell their clients: ‘Make sure your expenses and distributions occur in the same year,’” states Jamie Canup, partner and chair of the Hirschler Fleischer tax practice in Richmond, Virginia, who was interviewed by U.S. News & World Report.

“The rules aren’t clear once you cross the calendar year,” states Deborah Ziff for U.S. News & World Report. “…but Canup says he wouldn’t risk trying to do it now that it’s 2016.”

If you missed out on getting tax benefits for a computer purchased last year, there are plenty of other advantages to the new legislation, and it is permanent for future years. Plus, the definition of a computer includes tablets, such as the iPad. Funds can also be used to purchase peripheral equipment, which includes a printer and scanner. Educational software is also eligible, but computer games are not.

“Peripheral equipment is defined as auxiliary machines designed to be placed under control of the central processing unit of the computer,” according to Ziff. “Exceptions include typewriters, calculators, adding and accounting machines, and copiers.”

In order to cash in on these new benefits, you must keep in mind some additional rules. First of all, the student must be the primary user of the computer and any peripheral equipment.

Furthermore, in addition to being the primary user, the student must be enrolled in an eligible educational institution. Another technicality to consider is that your internet access may be part of a bundle with other noneducational services, such as cable. If this is the case, it is best to speak to a tax professional to determine how to handle the bill.

“The legislation does two other things regarding 529 plans: It allows account owners who take a withdrawal but then get a refund from the school — for instance, because their child gets sick and has to drop out for the semester — to redeposit that money in the 529 plan within 60 days with no penalties,” states Ziff. “It also changes reporting standards that apply to account holders with more than one plan per beneficiary.”

Previously, 529 account administrators aggregated all accounts that had the same holder and beneficiary. New rules state that each 529 plan needs to keep its own discrete ratio of earnings and contributions. This is a good thing, because it allows account holders to decide exactly where they want to withdraw funds from.

“This matters because only earnings are subject to taxes and penalties for withdrawals that don’t qualify as educational expenses,” reports Ziff.

Although it isn’t necessary to give any special documentation to the administrator of your plan when you make a withdrawal, you do need to maintain and save records of your expenses and purchases, including the date and price of each. This information needs to be saved in your tax records.

“If the withdrawals were for eligible expenses, you don’t need to do anything when you file your taxes — just keep the 1099-Q form and your receipts in your tax records,” according to Lankford. “The 1099-Q will specify which portion of the withdrawal is considered principal and which is earnings.”

So, if you already have a 529 plan, keep this information in mind to get the most bang for your buck, and if you are looking for a new plan, make sure to talk to your financial adviser to find the best one.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.